Sara Lee boosts R&D, ad budgets  a bit

New CEO Brenda Barnes and a couple of fellow PepsiCo expatriates are aiming to make Sara Lee Corp. brands the dominant names in the bread and meat categories. But they'll be doing it on a shoestring compared with what they had to work with at the soft drink giant.

And even as Ms. Barnes boosts Sara Lee's annual R&D and marketing spending about 35%, scouts for an executive to oversee product development and pushes to roll out more innovative products, some observers wonder whether the extra investment will be enough to grow Sara Lee's sales 2% to 4% a year, as the company wants.

"Our . . . scenario calls for 3% organic sales growth, which Sara Lee has not achieved in several years," Lehman Bros. analyst Andrew Lazar writes in a recent research note. He estimates that of the extra $250 million Sara Lee will spend on marketing and R&D, $100 million will go toward advertising  an amount that "may not be sufficient."

Despite the added dollars, Mr. Lazar estimates Sara Lee will be spending far less on advertising than its peers  about 3% of the expected sales of businesses Sara Lee will retain after a restructuring announced earlier this year. That compares with the 8.4% Kellogg spends and General Mills' 4.6%.

"You'd expect some proximity to the mean in terms of spending," says Jim Coleman, an Accenture Ltd. partner who heads the consulting firm's retail and consumer goods practice. "The most important thing is for the increased spending to be focused on the parts of the business with the greatest growth potential."

That's what Sara Lee's food and beverage unit CEO, Christopher Fraleigh, says the Chicago-based company is doing by focusing on bread and meat, "two enormous categories that are growing and don't have a clear leader," he says.

With its Ball Park and Hillshire Farm brands, "We're battling it out for the top spot," Mr. Fraleigh says of the hot dog and deli meat categories, where Kraft's Oscar Mayer leads.

Still, Sara Lee will be doing so with a relatively small budget. Pepsi, where Mr. Fraleigh and Ms. Barnes both worked, devoted 6% of its $31.6 billion in sales to advertising in 1996, the year Ms. Barnes left the company.

Sara Lee, by comparison, spent $425 million on advertising in 2004, or 2.2% of its $19.6 billion in sales for the year; the company declines to break out its R&D spending.

DEMANDS ON BUDGET

Comparing Pepsi and Sara Lee's budgets is "apples and oranges," says Mr. Fraleigh, who was vice-president of colas at PepsiCo. "The size of the businesses and the categories are so different," he says, adding that he feels good about the resources available at Sara Lee.

But in the midst of a massive transformation, in which Sara Lee faces $1 billion in restructuring costs, are there enough resources available to boost the brands? In addition to increasing its marketing budget, Sara Lee aims to use savings gleaned from restructuring  as well as proceeds from divestitures  to reduce debt, buy back shares, pay dividends and make acquisitions.

But it looks like Sara Lee will have less money at its disposal than previously planned. The company last week announced a $350-million pre-tax writedown related to its European apparel and U.S. retail coffee businesses, indicating that those units won't fetch as much as hoped (Crain's, June 20).

Sara Lee won't disclose how much it seeks from divestitures, but Lehman's Mr. Lazar thinks the company will net $3 billion. Kenneth Zaslow of Harris Nesbitt, meanwhile, last week cut his estimate about 20% to $2 billion.

Some investors, like Ferguson Wellman Capital Management in Oregon, are losing patience. The firm recently cut its Sara Lee holdings in half to roughly 25,000 shares. "For them to grow the business, they really need to put something behind it," says Jason Norris, vice-president of research. "We want to wait and see if they can execute."